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Monday, September 28, 2015

The Purse Strings Tightened

After a weekend of tranquility from the stock trading scene, investors broke the bank on Monday to open another week defined by a monstrous bearish wave of sentiment. Dow futures opened once again predicting a loss with news of an Alcoa split and a giant energy merger to play out during trading hours. The Dow Jones Industrial Average broke into the 15,000's with a low around 15,981 and a close down -1.92% at 16,001. The Global Dow Index sits about -0.32% lower hinting that a lot of the damage was compartmentalized to the U.S. stock market. The S&P 500 fell -2.57% below the 1,900 level where the correction had established a support. The 50-day trend line breaks farther from the long-term 200-day trend as NASDAQ's trend line's finally complete the reversal signal called the "death cross." The technology indicator dragged down by a biotech slump is approaching a break-even performance for the year as its three-month losses amount to -8.36%. Falling with the market were the two crude oil indicators, Brent and WTI which both lost $1.26 and $1.27 which is -2.6% and -2.8% on weak demand outlook. Commodities saw a systemic decrease after the dollar strengthened on a continuation of global economic weakness. With bearish sentiment around crude and equities markets, a lot of energy companies fell today. Some of the biggest losers were Chevron and BP who lost -2.48% and -3.45% respectively. The overall energy sector lost -3.66% today, more than the past five trading sessions which ended at -3.15%. It was the third most losing sector today in a declining market with more than 1 billion in selling volume. If the uncertainty in the past had resulted in lateral movement as investors were waiting for some sign of strength, the uncertainty now has pushed that lateral movement into a more direct downtrend. The VIX volatility indexed increased a whopping 16%. Tightening capital conditions are squeezing the optimism out of the mergers and acquisitions that have been looking for stabilization in the current economic atmosphere. Investors discounted the stock of Energy Transfer Equity LP as it organized one of the largest acquisitions in the energy sector, the purchase of William's Co for $32.6 billion. A sell-off dropped the acquirer's stock almost 13% as the big market move was initiated today. They aren't the first to experience losses as acquirers either. It seems that investors are discouraging large purchases of smaller companies as short-term investment spending like acquisitions are perceived to have a higher risk than more conservative long-term investment expenses. The financial extension of buying and assimilating external assets is frightening investors in a time where they are debt averse. Even though interest rates are still low, the economic squeeze is still weighing in on balance sheets. Furthermore, if inflationary pressures remain very low, companies could see a hefty price tag come back to haunt them as the expansion of money still remains relatively muted. This is especially the case for energy companies looking for a way to assure the efficacy of operations during the price slump. As many break-even points are broached because of low selling prices, many executives might look for economies of scale to reach that point of higher profits. Large cap corporations might perceive the ability to sustain an acquisition with their large capital purses and fashionable credit ratings, but the extra effort needed to incorporate new assets in an already established infrastructure costs that extra dollar low energy prices won't give. Investors are understanding this fundamental crunch and, in turn, looking poorly upon large-scale asset shopping. As I've said before, now is the time to buckle down on capital and dedicate the extras one might find into lowering that break-even point. That is the only way to climb out of a slump that appears so long-term like this one.

A comparison between the Dow Industrial index and the Dow Transportation index is a popular technical litmus test of market health similar to the VIX measure of volatility. A ratio analysis of the to can provide insight on where demand is going and whether an investor should feel more bearish than bullish or vice versa. Here, we see two stories. A greater bullish run from transport stock seems to be outperforming the industrials as of lately, but the past two weeks have been the other way around. We can see a reversal signal around the 24th of September when the MACD crossover point occurs the same time the price falls below the 200-day average. A transportation sector underperforming typically shows a decrease in overall demand as industrial stocks are perceived as more inelastic investments. The down trend in the market today would be supported by this bearish data as falling volume statistics depicts a deflated equity's market. That could be another reason why mergers and acquisitions are discouraged as well. Negative sentiment surrounding stocks, in general, are intensified by the prospects of an expansion of capital expenditures. I would predict further negative sentiment around companies looking to expand in times like these as bond securities gain popularity as perceived risk increases in the equities. Once again, sell-offs are exceptionally prone in the energy sector where low revenues are all but ensured with the price slump. Let's batten the hatches and look forward to third quarter corporate and economic data that will give traders reasons to go long.